Overconcentration Into Oil, Gas and Energy Securities is Unlawful
Everyone knows the phrase, “Don’t put all your eggs in one basket,” but this theory doesn’t always get put into practice — especially when it appears that the basket is secure, well-padded, and guaranteed to offer absolute protection. Unfortunately, when it comes to oil, gas, and energy securities, time has proven that the energy sector “basket” was not as safe as investors were led to believe.
Investors who lost big on oil, gas, and energy securities may not want to take these losses on the chin, and the law may be on their side. Indeed, overconcentrating the portfolio of a conservative, moderate, retired, soon-to-retired, elderly, or disabled investor into any one sector of the economy is extremely irresponsible and it’s also unlawful.
At the Consumer Investor Resource, our investment fraud counselors happy to talk with you about what happened in your case and advise you of your legal rights and options.
Before we go deeper into the law in this matter, though, let’s look at what happened…
Here’s What Happened
When the energy sector was booming, many investment advisors recklessly herded their customers into this extremely profitable sector of the economy. As their customers experienced energy-related profits, satisfaction levels rose, and the investment advisors falsely gained their customers’ trust and confidence.
Happy customers attract more customers through word of mouth, which increases the size of a broker’s income — and his professional notoriety — while he lines his employing firm’s coffers with new client capital.
Unfortunately, however, the profits experienced by the energy sector were not permanent. To make matters worse, when the energy sector was declining, many brokers did nothing to try and mitigate their clients’ damages, nor did they try to salvage customer portfolios from further losses. Instead, many brokers doubled up on energy sector securities, convincing their clients to “stay the course” and wait for the energy sector — and their retirement portfolios — to recover.
Playing the market like this was a dangerous game. Unknowingly, investors were moved into levels of risk they never agreed to — which was precisely the opposite of what advisors should have been doing. They should have liquidated their clients’ energy sector holdings at the slightest hint of instability and redirected their savings into calmer waters. More importantly, though, they never should have been overconcentrated into gas, oil, and energy sector securities in the first place.
Sadly, many people trusted their advisors when they told them to “stay the course” because the advisors had gained their clients’ trust through what seemed to be good investment advice that grew their accounts when oil and energy were performing well. These individuals ended up losing decades worth of hard earned savings, sometimes to the tune of millions of dollars, as a result.
Most investors who suffered huge losses due to the oil/gas sector decline feel like they should have known better. They feel the enormous burden of responsibility. But investors who went to a qualified investment advisor for help should realize that they did everything they were supposed to by trusting an expert. The burden of fault in many of these situations lies on the shoulders of the reckless and negligent advisor, not the investors who fell into the trap.
Did You and Your Family Fall Into This Trap?
If you and your family fell into this trap – and it really was a trap – you are not alone. Millions of investors suffered devastating financial losses – and billions of hard-earned retirement savings were squandered – because unlawful investment advisors ignored the most basic principal of investment: diversification.
What Does the Law Say About Overconcentration?
Overconcentration into one sector of the economy – like the energy sector – is not only a violation of common sense, it’s a violation of state and federal securities laws, and Financial Industry Regulatory Authority (FINRA) rules and regulations.
According to the law, investment advisors are legally bound as fiduciaries to serve the best interests of their customers only. Just like a doctor must hold his client’s health and wellbeing above his desire to make money and sell his services, an investment advisor must hold his clients’ best interests above his own. Furthermore, investment advisors are legally bound to know their customers and recommend a suitable allocation of investments that fit their customers’ financial needs, goals, life stages, and economic circumstances.
This is why overconcentration is particularly unlawful. When it is clear that an investment advisory customer did not want to be exposed and/or should not have been exposed to the high levels of risk associated with an overconcentrated portfolio allocation, it is unlawful to violate the investor’s best interests and wishes by risking his or her savings in this fashion.
What Rules/Regulations Support Overconcentration Claims?
When victims of overconcentration pursue claims to get their money back — and a lot of victims have already done this successfully — a number of state and federal laws will be cited to strongly support those claims. In addition, two Financial Industry Regulatory Authority (FINRA) rules will weigh heavily in these cases: FINRA Rule 2111, Suitability; and FINRA Rule 2090, Know Your Customer:
FINRA Rule 2111, Suitability, states that an FINRA-registered investment advisor must have a reasonable basis for believing that the transactions recommended and/or overall investment strategy recommended are suitable for you. The basis for the advisor’s recommendation must come from information gathered about you through the advisor’s reasonable diligence to determine your unique investment profile.
In other words, under Rule 2111, your advisor must learn about your needs, objectives, financial situation, investment experience, liquidity requirements, risk tolerance level and other information you provide – and the advisor needs to provide advice in tight alignment with this information. Failing to do so is a suitability violation.
FINRA Rule 2090, Know Your Customer, prevents your investment advisor from saying, “But I didn’t know that about my customer.” Rule 2090 says, that your broker must employ reasonable diligence when opening and maintaining your accounts to know and keep essential facts that would affect the investment advice he gives to you.
Victims of an overconcentrated investment portfolio can use these laws and many other state and federal laws to try and get their money back.
But Shouldn’t a Broker Concentrate My Money into High-Performance Areas?
No. It does not matter how well a particular sector of the economy was performing at the time. Even if it was skyrocketing at unprecedented levels of profit, this should not lead to an unbalanced and over-weighted portfolio allocation. In fact, high performance in one sector should be a red flag of caution. What goes up can just as easily come down and quickly, so if the goal is asset preservation and secure growth, areas of the economy exhibiting rapid growth (like the real estate sector in the late 2000s and the tech sector in the late 1990s) should be viewed with extreme caution by moderate and conservative investors – especially retirees. To do otherwise is not what a responsible investment advisor would call investing — it’s called “gambling.”
To invest a large percentage of any individual’s portfolio into one sector of the economy – even if the securities are from different companies – is extremely risky. The overconcentration puts the investor’s portfolio out of balance. And this is why commonly accepted moderate and conservative portfolio allocation theory requires the requisite number of stocks, bonds and other classes of investments from different sectors of the economy. This is the best way to secure a portfolio against the chance of market volatility.
Maybe It’s Time to Stand Up for Your Rights
When large investment losses could have and should have been avoided — if competent direction had been provided — it should always be a red flag for further investigation. There are sound, effective, and solid ways of allocating a portfolio to dramatically reduce the risk of declines in the face of unstable market conditions.
Investors who experienced large portfolio caused by the reckless, negligent and unsuitable overconcentration of a portfolio into oil, gas, and energy sector securities, may have strong claims to seek financial restitution in court. If you have any questions, contact the Consumer Investor Resource Center, our securities law counselors will be happy to listen to your story, tell you about the process of filing a legal claim to get your money back, and inform you of your legal rights and options.
If you have any questions, contact the Consumer Investor Resource Center, our securities law counselors will be happy to listen to your story, tell you about the process of filing a legal claim to get your money back, and inform you of your legal rights and options.